Avenues for combating persistent poverty and inequality in Latin America

After going through bouts of crisis or economic slowdown in the late
1990s and early 2000s, Latin America now enjoys brighter economic prospects
and an ongoing recovery. But poverty and income inequality remain stubbornly
high and deep-rooted. While the region overall is on track to meet the
Millennium Development Goals (MDGs) relating to human development—being
ahead of other regions in terms of child mortality, access to safe water,
and gender equity in education—it lags behind on achieving the poverty
goal (together with sub-Saharan Africa). Indeed, the World Bank estimates
that Latin America is at risk of falling short (by 1 percentage point)
of meeting the MDG of halving the 1990 level of poverty by 2015.

Exactly how big is the poverty problem? How come more progress has not
been made? And what can be done to turn the situation around? This article
explores these questions, suggesting that the key to reducing poverty
in Latin America, a region of half a billion people, is to create a level
playing field—providing the poor with the opportunities to improve
their living standards through access to education, health, infrastructure,
and financial services. Improving the access of the poor to assets and
services will help them share in, and contribute to, economic growth.

A snapshot of the problem

Poverty measurement is a challenge for analysts and policymakers. International
organizations use purchasing power parity (or PPP) figures, as these facilitate
international comparisons. Using a level of $1 PPP a day, the World Bank
estimates that extreme poverty in the region declined from 11.3 percent
in 1990 to 9.5 percent in 2001—although, because of population growth,
the number of people living on $1 a day stayed at 50 million during that
period (see table). For more recent years, preliminary estimates show
a slight increase in the poverty rate. But based on a benchmark of $2
PPP a day, the region has not made much of a dent in poverty. The World
Bank estimates that poverty has held at around 25 percent of the population
since the mid-1990s. And because of population growth, the number of poor
actually increased to around 128 million in the early 2000s.

Not enough progressLatin America has made modest gains in reducing poverty in percentage
terms, but the absolute number of people living below the national
poverty line now exceeds 200 million.

Extreme
povertymeasured by PPP and national poverty lines (regional trends)

PPP–millions
living on less
than $1 a day
PPP–percent of people living
on less than $1 a day

1990

49.0

11.3

1996

52.0

10.7

1999

54.0

10.5

2001

50.0

9.5

People living
below the extreme
national poverty line (millions)
Percent of people living below the
extreme national poverty line

19901

19951

86.0

19.0

20001

90.3

18.3

Latest2

83.6

16.2

Moderate
povertymeasured by PPP and national lines

PPP–millions living on less
than $2 a day
PPP–percent of people living
on less than $2 a day

1990

125.0

28.4

1996

117.0

24.1

1999

127.0

25.1

2001

128.0

24.5

People living
below the moderate
national poverty line (millions)
Percent of people living below the
moderate national poverty line

19901

19951

183.4

40.2

20001

202.3

40.9

Latest2

203.3

39.2

PPP=purchasing
power parity.
Source: PPP figures–World Bank. Estimations for
national poverty lines are from the Socio-Economic Database for
Latin America and the Caribbean (World Bank and CEDLAS/Universidad
de la Plata)1The actual date may be two years earlier or later.2Around 2002.

Yet analysts and regional organizations frequently quote poverty levels
in Latin America and the Caribbean that are much higher. That is because
countries adopt their own national poverty lines to take account of both
domestic economic and social conditions and their own standard of well-being.
These national lines are not strictly comparable across countries, but
they do enable governments to track progress and determine the number
of people who could potentially benefit from poverty alleviation policies
according to country-specific living standards.

Using national poverty lines (based on data from the Socio-Economic Database
for Latin America and the Caribbean), poverty affects 39 percent of Latin
Americans, meaning that more than 200 million lack incomes sufficient
to cover basic food and nonfood expenditures. As for extreme poverty—which
attempts to measure the inability to pay for a food basket of minimum
caloric intake—the rate dropped slightly from 22.5 percent in the
early 1990s to 18.6 percent in the early 2000s, with the actual number
of people living in extreme poverty now standing at around 96 million.

Moreover, the regional averages hide considerable differences in the
levels and trends among countries. For example, according to national
poverty data, the poverty rate ranges from above 60 percent in Bolivia
and Honduras to below 30 percent in Chile and Uruguay. Moreover, even
within countries, these rates vary significantly, especially along ethnic
lines (see "Latin America's Indigenous Peoples" on page
23). In Mexico, recent data show that 90 percent of the indigenous population
live below the national poverty line compared to 47 percent for the non-indigenous
population. In Guatemala, these figures are 74 percent and 38 percent,
respectively. And in Brazil, poverty among the Afro-descendants is 41
percent compared to 17 percent among the whites.

Accounting for the high poverty rate

Why has poverty remained so high? First, economic growth has been insufficient.
It is well documented that sustained poverty reduction is closely associated
with economic growth, but the region achieved a lukewarm 1 percent per
capita growth rate over the past 15 years. Moreover, the responsiveness
of the incomes of the poor to that growth (known as poverty-growth elasticity)
can vary greatly. One factor that feeds into the degree of responsiveness
is the level of inequality, and in the case of Latin America, inequality
of incomes is extremely high (see Chart 1). As a result, on average, each
1 percent of growth in the region translates into just 1 percentage point
fall in poverty—and for the region as a whole over the past 15 years,
growth has barely averaged above 1 percent annually.

Second, the growth that has occurred during this period has not generally
been pro-poor. As Chart 2 shows, for many countries, such as Paraguay
and Argentina, since the mid-1990s per capita income for the poorest 40
percent fell, not rose. In those countries in which per capita incomes
for the poorest rose, the increase was less than for the average population
as a whole. Only in a handful of cases—Chile, Nicaragua, and Peru—was
the increase in the incomes of the poor significantly above the national
average growth.

Third, although macroeconomic stability in the region over the past 15
years has generally improved, the succession of economic crises, particularly
in the late 1990s and early 2000s, proved devastating for the poor. For
example, the poverty rate shot up from 30.8 percent to 58.0 percent in
Argentina between 1999 and 2002, and from 26.6 percent to 42.2 percent
in the Dominican Republic between 2002 and 2004. Indeed, several studies
have shown that economic crises in the region since the mid-1980s have
ratcheted up poverty rates even after economic recovery from the crisis
has taken hold.

Fourth, the poor lack the minimum level of assets to fully benefit from
the growth process. This includes deficiencies in the level and quality
of education and health, as well as in access to basic social services
and infrastructure, such as paved roads, reliable electricity, clean water,
and sewerage. They also face unequal opportunities in access to credit,
justice, risk management, and property rights. And the poor often face
lower returns to their endowments and productive activities because of
their place of residence or plain discrimination.

Finally, we have more evidence now that deep poverty and inequalities
of opportunity can also undercut growth, as argued in the World Bank's
World Development Report 2006 (see "The Inequality Trap"
on page 34 of this issue) and a forthcoming World Bank report on Latin
America. Thus inequalities of opportunity not only prevent Latin America's
poor from benefiting from growth but can also lower economic prosperity
for the region's population as a whole. Inequality of opportunity
matters the most for development policy because it is amenable to effective
public policy intervention.

Providing opportunities

So what can policymakers do to turn the situation around? A vital component
of any poverty reduction plan will include addressing the constraints
that the poor face in accessing assets and services, so that they can
secure better jobs and boost productivity. A key way to do this is through
concerted actions in social policy and the growth and competitiveness
agendas of most countries. But additional efforts are needed to ensure
that the poor benefit at least as much as the rest of the population from
actions on these fronts. This is, however, a multifaceted challenge. In
some cases, the poor will benefit the most from targeted programs such
as means-tested conditional cash transfers, urban development of slums,
or rural infrastructure programs. In other cases, the provision of services
need reform to ensure that the poor are well served (assuring similar
quality of education, or promoting financial expansion). The good news
is that there are a number of promising avenues under way in the region.

Building human capital with smart transfers.
Human capital (encompassing the level of education, health, and nutrition
of the population) is quintessential for enhancing the productivity of
Latin America's poor. Recently several countries have successfully
pursued a new generation of cash transfer programs. In previous decades,
there was a lot of skepticism about the potential role of cash transfer
programs as poverty alleviation mechanisms, because they were seen largely
as short-run remedies that were difficult to target effectively and ran
the risk of being appropriated for political purposes. The new wave of
social assistance makes cash transfers conditional on the beneficiaries
sending their children to school and receiving basic maternal and infant
health care. As a result of strong positive impacts from rigorous evaluations
in Brazil, Colombia, Honduras, Mexico, and Nicaragua conditional cash
transfers are now regarded as important components of a long-term poverty
reduction strategy. These programs are well targeted, and while their
impact on primary enrollment is small where levels are already high, they
have had a large impact on delaying dropout and improving transition rates
and secondary enrollment (especially for girls). Overall, the average
impact on the grade attained at school is up by between 0.6 to 1.4 years
(see Chart 3). However, the coverage of these programs remains relatively
small, and they are by no means substitutes for well-designed measures
to improve overall access and the quality of educational, health care,
and child nutrition services.

Access to financial services. In Latin America,
many populist financial policies that were launched in the name of the
poor have failed. Unfortunate examples are subsidized credit and direct
state lending—policies that almost always ended up favoring the
better off. Countries have also tried microcredit, but even where it has
been successful, it constitutes a very small fraction of credit to the
private sector. In fact, informal finance institutions such as rotating
savings and credit associations are often less efficient than well-developed
credit markets (Besley, Coate, and Loury, 1994). In that sense, expanding
financial services to the poor requires broadening the reach of formal
financial institutions by improving the banking sector's infrastructure
for financial intermediation and developing approaches that encourage
banks to offer affordable financial products to poor households.

Access to infrastructure. Another promising
initiative—although it awaits rigorous impact evaluation—is
the territorial approach to infrastructure provision, where assets and
services may be provided exploiting local knowledge, local economies of
scale, and complementary development projects. In urban areas, programs
like the Favela Bairro in Brazil show that it is possible to turn urban
slums around and capitalize the investments made by their inhabitants.
A comprehensive program to improve physical infrastructure and public
services, education, and commerce, and provide income-generating activities
has helped boost both living conditions and the local economy. In rural
areas, community driven development efforts facilitated the efficient
delivery of basic infrastructure and services, including rural roads,
electricity, and potable water, in conjunction with credit and technical
assistance. The flagship example is the community-driven development projects
in northeast Brazil, where communities prioritize, manage, and monitor
investments through participatory municipal councils. A key element of
success is having an integrated vision of subnational development based
on local knowledge.

Translating opportunities into incomes

How can the equalization of opportunities be turned into higher incomes
and eventually a higher quality of life? The key is productive employment.
And for that reason, moving out of poverty in a sustainable way will require
generating good jobs and enabling the poor to access them. Over the past
15 years, employment in Latin America did rise, but most of the jobs were
created in the informal sector. This may be partly the result of the growing
number of women participating in the labor force and a shift toward jobs
in the service sector. But ultimately, the size of the informal sector
reflects decisions taken by firms and workers for whom the rational choice
is to operate outside the regulatory framework. Their low productivity
leaves them unable to pay taxes or make social security contributions.

To reverse this is an enormous challenge for the region. Part of the
solution is an increase in productivity by leveling the playing field
for the poor in terms of equality of opportunities. It also requires changes
in tax and labor legislation, along with more efficient public services
and a better quality and more inclusive social protection system. Ultimately,
workers must be able to afford health and old-age risk protection.

How will a more inclusive social policy for the poor be financed? Countries
choose how much they want to tax and redistribute. In Latin America, the
implicit social contract in the current structure of taxes and transfers
has failed to provide equal opportunities to vast segments of the population.
With exceptions, taxation is low and distortionary and social transfers
go disproportionately to the rich, either through public pensions, nonpreventive
health care, or public tertiary education (De Ferranti and others, 2004).
In many cases, an equilibrium of low taxes and low public expenditures
is maintained because the rich and the middle class opt out. Health services,
education, and social protection are paid directly by the rich, who do
not have any interest in exerting political pressure to improve the quality
of these services when they are provided by the government. The challenge
for Latin America is to modify the social contract to make it more inclusive
for both taxation and expenditure. This implies ensuring that the pattern
of social expenditures in general is not biased against the poor.

Defining an effective strategy

Since poverty is multifaceted, countries will need to adopt policy interventions
on multiple fronts, subject to scarce financial and political capital.
This means that they will have to find a way of coordinating these various
interventions, and the hope has been that this could be done through an
integrated poverty reduction strategy (PRS). In recent years, many Latin
American countries have tried this route, but the results are quite mixed.

The poorest countries (Bolivia, Guyana, Honduras, and Nicaragua) started
implementing PRSs in early 2000 under the Heavily Indebted Poor Countries
initiative. The idea was to link sector strategies to poverty reduction
in an integrated manner, while monitoring progress to assess the effectiveness
of the strategy. However, continuity and policy implementation have been
weak, the participatory decision-making process has not always been regular,
and poverty monitoring processes still have to be strengthened. As for
the middle-income countries, several of them—including Colombia,
Guatemala, Mexico, Paraguay, and Peru—have crafted PRSs or national
development strategies. In some cases, these have been government-crafted
strategy documents; in others, participatory processes were or are being
tried. In most cases, the strategies have not been effective in prioritizing
how to tackle the key constraints in the economy so that growth is translated
more effectively into poverty reduction.

These experiences point to three main lessons in shaping the agenda for
poverty reduction:

First, sustained growth is the cornerstone for poverty reduction,
but it needs to be accompanied by integrated strategies that encompass
economic and social policies to enable the poor to benefit and be part
of the growth process. Most governments in poor- and middle–income
countries are paying more attention to growth and to policies that facilitate
and foster job creation—not relying only on social sector policies
aimed at assisting the poor. Countries should recognize and act on poverty
reduction being also part of the agenda for growth and competitiveness.

Second, any strategy must prioritize and define the appropriate
and realistic set and sequence of policies, taking into account financial,
administrative, and political constraints. A strategy must
distinguish between "the essential and the merely desirable"
(Grindle, 2004). It must establish a roadmap, a sequence, and transitional
strategies, particularly when in the short run some segments may lose
from needed reforms. So far national plans have, in many cases, been a
comprehensive collection of well-intentioned policies and valid objectives,
reflecting the fact that poverty reduction implies making progress on
a multiplicity of fronts. But prioritization, although scientifically
and politically complex, is essential. It implies identifying what set
of reforms, and in what sequencing, is most effective at reducing poverty,
given budget constraints and what is politically feasible. The challenge
for each country is to establish a strategy that takes account of both
the fiscal and human resources, as well as the political capital, required
to pursue policy change.

Third, progress needs to be monitored and evaluated.
Formal poverty reduction strategies in heavily indebted poor countries
have included the implementation of monitoring and evaluation systems.
At the project level, there is a growing interest in impact evaluation,
and several countries (Brazil, Chile, Colombia, Mexico, and Peru) have
made progress in implementing various aspects of integrated monitoring
and evaluation systems. Such systems allow performance and financial indicators
at the program and sector level to be monitored and fed into a centralized
system that can be used in the budgetary allocation process. But progress
in this area is uneven, and there is a long way to go before these systems
and a results-oriented culture are institutionalized. The key point is
that for resources to be spent in providing opportunities to the poor,
the state has to facilitate accountability and needs to establish the
mechanisms for a transparent and efficient monitoring of the use of public
resources.

* * * * *

Thus, while poverty and inequality remain entrenched, it is becoming
increasingly clear how progress can be made on improving living standards
in Latin America. The huge disparities between the rich and poor should
be tackled by providing the poor with a fair social and productive asset
base—that is, leveling the playing field. This will allow them to
move out of poverty, so long as they are able to access the opportunities
in the labor market that will enable them to boost their incomes. And
this will in turn improve economic prospects for all Latin Americans.
Several avenues are proving to be effective. But in most cases, the biggest
challenge will lie in defining and implementing the priorities of poverty
reduction strategies, given the financial and political constraints.